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An EU Perspective On Wage Inequality

In the years before the financial crisis of 2008, there was a significant reduction of overall EU wage inequality, driven by economic convergence between rich and poor Member States. The 2008 crisis reversed the trend, expanding pre-existing wage differentials between countries. The impact of the crisis on wage inequalities within countries has also been very different across the EU.

Although it is still far-fetched to speak about a single European labour market, the very significant extent of economic integration in recent years makes a European perspective on the wage distribution not only relevant, but necessary to evaluate the wider consequences of the single market. And yet, there is a surprising lack of studies from a truly EU perspective on this issue. In the report “Recent developments in the distribution of wages from an EU perspective”, we present the findings of a study recently carried out by Eurofound trying to cover this gap and look at wages from a pan-European perspective.

1. Visualizing the distribution of wages from an EU perspective

Because the EU labour market is still strongly divided by national boundaries, any analysis of wages from an EU perspective has to simultaneously take into account two axis of the distribution: the between-country and the within-country. This is visually represented by figure 1.

Figure 1: The distribution of gross full-time equivalent wages in PPS within the EU in 2011 (Source: EU-SILC)

This figure represents, on the horizontal axis, intervals of monthly full-time equivalent wages in Purchasing-Power Parity Euros; in the vertical axis, the percentage of European employees reporting wages in each interval. So, for instance, we can see that nearly 4% of European employees earn between 1500 and 1600 euros per month, on a full-time equivalent purchasing power parity basis. But most importantly, each bar is broken down by country: this way, we can see that although countries have distinct positions in the overall EU wage structure , there is a significant amount of overlap. For instance, while Eastern Member States dominate the bottom 20% of the overall EU wage structure, the UK and Germany represent a large share of the European wage mass at higher wage levels. On the very extreme of the distribution, around half of the top 1% best paid European employees work in the UK. Nevertheless, despite their dominance in the upper part of the wage distribution, the UK and Germany have a significant presence in the bottom 20% as well. Again, it is important to emphasize that the comparison is carried out in PPS terms: otherwise, there would be much less overlap.

2. The distribution of wages in Europe before and after the crisis

Table 1 below shows a number of inequality statistics for the EU wage distribution, and their change over the period 2004-2011. Two points stand out:

  1. The Gini index for EU full-time equivalent EU wages in PPS is 0.346 (in 2011). This value is considerably higher than the comparable measure for most EU countries but lower than the value of the three most unequal member states (the UK, Portugal and Latvia). This level of wage inequality is lower than that of the most comparable international entity, the US, which according to a recent OECD estimate has a Gini index of around 0.4 among full-time employees. 
  2. Between 2004 and 2008, EU-level wage inequality decreased. After 2008, it increased. The pre-2008 decrease was entirely the result of a reduction of between-country wage differentials (within-country inequality remained broadly stable). After 2008, there was no further reduction of between-country differentials while within-country inequality tended to increase in overall terms.

Table 1: Some statistics of wage inequality for the EU (gross full-time equivalent wages in PPS), 2004-2011 (Source: EU-SILC)

3. The evolution of wage differentials between countries

Figure 2 below provides a more detailed look at the evolution of between-country wage differentials, drawing from AMECO data. The 2004-2008 convergence in national wage levels was mostly driven by a rapid process of catch-up by Eastern Member States and a stagnation (even decrease) of wages in the two biggest countries (UK and Germany). Southern European average wage levels only converged in nominal terms before 2008, remaining stagnant in real terms. The reversal of convergence after 2008 was driven by a large drop of wage levels in Southern Europe (in nominal and real terms), while German wages started to timidly grow.

Figure 2: Evolution of nominal and real wages, 2000-2014 (Source: AMECO)

4. The recent evolution of wage inequalities within EU countries

Finally, figure 3 shows the evolution of the Gini index of full-time equivalent wages for each Member State over the period 2004-2011. There is a wide diversity of developments, but perhaps the most common pattern is a cyclical one, with wage inequality increasing until 2008 and decreasing afterwards. The biggest exception is the UK, where wage inequality behaved in the opposite way and so strongly that it largely determined the within component of overall EU inequality. According to our analysis of EU-SILC data, the UK has the highest level of wage inequality in the EU: its Gini index was 0.404 in 2011, significantly higher than the Gini for the EU as a whole and similar to the comparable level for the US. On the other hand, wage inequality consistently decreased throughout the whole period in many Eastern European member states, while it consistently increased in Austria, Belgium and Denmark.

Figure 3: Gini index of gross full-time equivalent wages (Source: EU-SILC)

However, the impact of the crisis on within-country wage inequalities must be put in the wider context of developments in employment levels and overall income inequalities. Wage inequality has declined in around two-thirds of European countries from the onset of the crisis, partially due to the compositional effects arising from employment losses affecting disproportionately more lower-paid workers. In particular, in some Southern European countries, such as Spain, the reduction of wage inequalities after the crisis was the result of a massive destruction of employment, which shifted some of the existing inequality outside of the labour market, increasing it significantly in overall terms. On the contrary, the UK experienced a marked rise in wage inequality after the 2008, driving EU-wide inequality trends, while inequality of overall disposable income at the household level remained rather stable in the country. This contrast is probably linked to the comparatively good employment record of the UK after the crisis, which prevented the emergence of the compositional effects mentioned above. Germany is one of the few countries that experienced reductions in wage inequality against a background of growing employment levels in the crisis period.

It is important to note that the figure for the US is just a reference for a rough comparison of our overall EU figure. Since it covers only full-time workers, it is not strictly comparable to our estimations for the EU. If both full-time and part-time workers were included, the US Gini index would most likely be larger than the figure shown here.

This blog is based on research, carried out by the authors for Eurofound, the full report can be downloaded from: http://bit.ly/1KJcXnh

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